Abstract
For a nation to thrive and achieve economic prosperity, clear pathways and plans to give access to quality education have to be established. This is because education is the fuel that an economy needs to maximize opportunities. This brings a need to have tuition plans like 529 plans in place. Sadly, studies show that a significant number of people do not use the 529 tuition plans due to a lack of knowledge of its existence, or inadequate knowledge of how it functions. Being that this is a good investment plan that contributes positively to the future of the nation, there is a need to conduct in-depth studies of what a 529 savings plan entails. This paper gives an in-depth analysis of the 529 tuition plans in terms of their creation, purpose, and benefits. It also discusses the disadvantages of investing in the savings plan as presented in related studies. Discussions and data presented were gathered from reviewing related studies and drawing conclusions from them. Additionally, the paper’s findings conclude that the 529 savings plan indeed does produce a good return on investment. It also ascertains that 529 tuition plans are a positive alpha.
Introduction
The uncertainty of the future calls for remedying plans to be put in place to cater to any mishaps that may be presented. Sherraden (2018) notes that college certificates and degrees are the keys for so many individuals to open doors that lead to great opportunities. Patently, college tuition fees have imminently increased in the past 30 years and are projected to continue rising in the future (Arzt, 2018). This necessitates measures to be put in place to ensure that students continue to access college education and open more doors regardless of the increasing tuition fees. Savings programs like the 529 savings plan are therefore established to ensure a steady academic future for students.
A healthy nation requires people who can wisely invest in the future. Crandall-Hollick (2018) defines a 529 saving plan as a tax-friendly savings account created to stimulate people to save for their children’s education. 529 plans were first established in 2001 and they assist families in saving for college education (Armstrong et al., 2017). This paper aims at explaining the various forms of 529 savings plans, their policies, and the benefits accrued from them. In addition, it reviews related materials and discusses the results of the research concerning the profitability and security provided by employing the 529 savings plan in securing a beneficiary’s future.
Types of 529 Investment Plans
It is important to understand the different types of 529 savings plans available to a saver. Armstrong et al. (2017) classify the 529 savings plan into prepaid tuition plans and education savings plans. Prepaid Tuition Plans are an option for students who want to pay for their education in advance. They allow people to acquire units at public and in-state institutions for prospective tuition and required fees. These units are purchased at current pricing for the recipient. This plan, however, does not permit one to pay for future accommodation or boarding at institutions of higher learning. Additionally, it does not permit prospective payments for elementary or secondary levels of education. Education Savings Plans on the other hand allow one to save towards a beneficiary’s fees, accommodation, and boarding expenses. They are also more flexible in that, withdrawals can be used at any educational institution regardless of whether it is a public or in-state institution (Armstrong et al., 2017). It is important to differentiate between the two types of 529 plans before committing to saving.
Methodology and Data
Data presented in this section was obtained from secondary sources. This means that the information was gathered from reviewing related scholarly materials and analyzed to present facts. The rationale for obtaining data from secondary sources is attributed to the availability of large volumes of data from online sources. The data presented shows the popularity of the savings plan in the US, the disadvantages and common myths associated with the 529 savings plan. The information gathered also aims at describing the various benefits acquired from investing in a 529 savings plan that secures the future education of the beneficiaries.
The popularity of the Savings Plan in the United States
The 529 savings plan has not received as much attention as it should, considering the importance of investing in such a plan. Dickler & Epperson (2018) in an article published on CNBC note that May 29th is a 529 savings plan’s day but many households are not likely to celebrate it since they are unaware of its existence. Additionally, only 29 percent of US citizens seem to understand that 529 plans offer a way to save for college (Pressman & Scott, 2017). In this regard, the 529 savings plans should be advertised more to get more people to invest in their children’s future education.
How the 529 Savings Plan Operates
A saver is normally presented with several portfolios to choose from. The choice of portfolio largely depends on the objectives of the saver (Sherraden, 2018). After deciding on the portfolio to settle on, the saver then creates an account for the student. The interests accrued from the savings account are tax-free, so long as they get utilized solely for education expenditures (Curtis, 2020). Notably, the saver is the one to decide what time the funds are to be distributed. It is also important to note that these plans are sponsored by state governments.
Benefits of Using the 529 Savings Plan
There are numerous benefits associated with a 529 savings plan, and that can be used to entice investors to choose it to safeguard their dependant’s future in education. The 529 savings plans receive tax benefits when they are used to cater to education expenses (Crandall-Hollick, 2018). In most circumstances, eligible 529 plan distributions are excluded from taxable income, and many jurisdictions provide a state tax exemption or rebate for 529 plan deposits. This means that the 529 plan is the only college savings plan that benefits from state tax incentives (Crandall-Hollick, 2018). This makes the plan more attractive and affordable for all citizens.
Low prices associated with the reduced costs of investing in a 529 plan as compared to other education plans are available. This is evident in families with low incomes as the plan offers inclusive benefits such as reduced fees, lower contribution restrictions, and fairly conservative alternatives like age-adjusted portfolios (Chang et al., 2018). For this reason, the 529 savings plan is considered one of the most affordable investment plans (Chang et al., 2018). Additionally, there are reduced costs of maintenance as families can choose to have the contributions automatically deducted from their accounts instead of struggling to make deposits manually.
There is also a flexibility element of investing in a 529 plan as the portfolios offer equal returns to the beneficiaries regardless of their place of residence or level of income. The only difference, however, is that some states offer state tax reliefs for 529 investors. Moreover, savers can employ the plans for an unlimited number of beneficiaries (Ferguson, 2018). Also, the saver can be able to change beneficiaries of the plan at their convenience. This does not limit the parents who may want to change the beneficiaries due to their reasons. In terms of control, the savers are entirely responsible for these savings as they get to decide when they will be remitted to the beneficiaries.
Disadvantages of Using 529 Savings Plan
With all the attractiveness of the 529 savings plan, some researchers argue that the plan sounds too good to be true. They, therefore, highlight a need to address the disadvantages that may accompany the use of the 529 savings plan. Pressman & Scott (2017) point out that, high penalties are resulting from withdrawals made that do not regard education expenses. Figuratively, these withdrawals are subject to income tax and a 10 percent penalty on the interest from the withdrawal portion of the investment. This makes the investments rigid as withdrawals can only be made only to cater to education needs, contrary to which, they are subjected to high penalties.
Additionally, there is a limited choice of investments to choose from, as compared to other investment plans. This includes limited portfolios that may be restricted by the state governments (Chang et al., 2018). This limits investors who are interested in diversifying investment risks or maximizing returns. Also, the owner of the account or the saver has exclusive rights to when the funds are released. This may cause problems for a beneficiary if the saver decides to not remit the contributions in the future. This is particularly challenging in cases where the beneficially may have entirely depended on the savings plan with no backup.
Results
One of the most essential investments that parents should thrive to make in securing their children’s future and college education. Even though numerous savings alternatives exist, many parents get perplexed in selecting the best alternative for their children (Clancy & Beverly, 2017). 529 plans are a great choice since researchers have attributed them to low costs of investment. This is especially for underprivileged families as they are presented with benefits like reduced fees, lower contribution restrictions, and fairly conservative alternatives like age-adjusted portfolios. For this reason, households should consider investing in the 529 savings plan as the low costs will translate to fewer deductions and hence a good return on investment.
The revised tax laws have made 529 investment plans even more tempting. This is because, the revised tax laws provide for total tax-free benefits on eligible withdrawals (Crandall-Hollick, 2018). While other types of investments struggle with tax deductions, investments on the 529 plan are safe as they are sure not to be touched by the taxman. Conversely, some states also offer tax benefits to individuals who have invested in the 529 plans. This further makes them even more suitable since all these tax exemptions result in greater returns on the investments. This security or assurance of good returns on invested amount makes the 529 investments a positive alpha.
Conversely, the 529 savings plan reduces the financial burden of having to worry about the rising fees associated with tertiary education. This in return puts both the beneficiary and the parent at ease and a good mental state and in return, they can focus more on being productive (Pressman & Scott, 2018). This shows that the benefits of a 529 savings plan go beyond financial security. It also promotes health security due to a reduced state of uncertainty and worry.
With a 529 plan, parents are relieved from the costs associated with the maintenance of investments. This is because the plan offers a more hands-off approach of management such that contributions can be set to occur automatically without member intervention, or are reduced to as simple a task as the click of a button. These maintenance obligations are instead transferred to third-party investment companies hired by the state treasurer’s office. These further contribute to the benefits accrued from the use of a 529 savings plan.
The results of the findings also indicate that parents must first check to see if their state system gives a state tax exemption before committing to a 529 savings plan. In addition, some 529 plans offer a choice of portfolio diversification options, allowing individuals to customize their assets to meet their risk inclinations. This results in numerous benefits for the investors. To be on the right track, potential investors of the 529 plans should specifically evaluate the cost of investment as the charged fees do matter tremendously.
Conclusion
A college education is important to students and the society at large since some of the benefits like better access to opportunities can be realized. In this regard, the best investment decision parents can make is to invest in the future of their children. Conversely, the rising tuition fees constantly exert pressure on parents as they are unsure of what the future holds. To remedy these concerns, parents should invest in an educational savings plan. This includes looking for secure savings programs that help make life easier for both parents and students.
Notwithstanding the few challenges associated with the 529 savings plan, it is amongst the best solutions that can guarantee good returns on investment. Although the 529 savings plans cannot promise that they will outperform other assets, they do provide several advantages over other investing methods with similar risk profiles. These include low investment costs, reduced costs of maintenance, reduced financial burdens, and most importantly, federal and state tax benefits. For this reason, a return on investment on a 529 savings plan is likely to be higher than that of any other savings plan.
The 529 savings plan being a government affair, makes it more reliable and secure. This security of investment is better guaranteed since it is not a program likely to disappear overnight and cause losses to investors. Also, there is a guarantee of returns as the savings program is a state affair that targets the welfare of the citizens. This compared to investing in unknown schemes, is rather secure as investors are assured of the benefits. This makes the 529 savings plan a positive alpha and a beneficial investment plan.
References
Armstrong, J., Carlson, A., & Laderman, S. (2017). The State Imperative: Aligning Tuition Policies with Strategies for Affordability. State Tuition, Fees, and Financial Assistance Policies 2017. State Higher Education Executive Officers. Web.
Arzt, N. H. (2018). The Business of higher education: The American University and its banking function. Routledge. Web.
Chang, C. E., Krueger, T. M., & Wrolstad, M. A. (2018). Maximizing college savings through the selection of low-cost 529 plan portfolios. The Journal of Wealth Management, 20(4), 55-64. Web.
Clancy, M. M., & Beverly, S. G. (2017). Statewide child development account policies: Key design elements. Web.
Crandall-Hollick, M. L. (2018). Tax-preferred college savings plans: An introduction to 529 plans. CRS Report, Congressional Research Services. Web.
Curtis, Q. (2020). Costs, conflicts, and college savings: Evaluating section 529 savings plans. Yale journal on regulation., 37, 116. Web.
Dickler, J., and Epperson, S., (2018). Few people know about this key college savings plan. CNBC. Web.
Ferguson, M. (2018). Washington View: New tax plan provides little cheer for education. Phi Delta Kappan, 99(5), 74-75. Web.
Pressman, S., & Scott III, R. H. (2017). The higher earning in America: are 529 plans a good way to save for college? Journal of Economic Issues, 51(2), 375-382. Web.
Sherraden, M. (2018). Asset building as social investment. Journal of sociology & social welfare, 45, 35. Web.